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Firms weigh benefits as EU power market coupling expands

For more than one year, day-ahead power market coupling has been in function in northwestern Europe. What are the consequences on price convergence? And what are the next actions?
Sia Partners contributed to an article written by Stella Farrington and published on the website Risk.net. We present a short summary of this article.

In the European efforts to achieve a single energy market, power market coupling is an essential step. The cross-border exchanges allow to even out price differences to ultimately lead to a single European power price. Advantages of coupling consist in narrower cross-border spreads, lower trading costs and easier risk management.

Day-ahead coupling was launched across North West Europe in February 2014 and globally well accepted although some doubts remain concerning future actions. This evolution was based on the coupling of the Central West Europe region (Belgium, France, Germany, Luxembourg and the Netherlands), achieved in 2010. Since last year, it has extended to Portugal, Spain and Slovenia.

Results on price convergence are striking. A Sia Partners analysis shows that price convergence in the CWE region was null in 2009 but increased to 15% in 2011 and to 19% in 2014, when NWE coupling was launched. However, results have been far lower over the last year: price convergence averaged around 8% in the CWE region. According to traders, that phenomenon can be explained by country specificities (about generation mixes and regulations) that have an impact on spreads.

Advocates of market coupling insist on the fact that price convergence is not the main objective of market coupling, but only a benefit. They add that the coupling algorithm is impacted by physical congestion (causing price divergence). Finally, including new regions suffering from congestion generates greater price differences.

Concerning the next steps to bring European power markets closer together, extending the coupled market towards the East is a priority. Additionally, the current methodology (available transmission capacities) should be replaced by flow-based market coupling in order to increase cross-border transmission capacities. But the second methodology is subject to criticism. Finally, intra-day power markets could also be coupled although implementation plans suffer from considerable delay.